Amoco (U.K.) Exploration Company and Others v Teesside Gas Transportation Ltd; Amoco (U.K.) Exploration Company and Others v Imperial Chemical Industries Plc and Others (consolidated appeals)

The appeals concerned the proper construction of the definition of the "Commencement Date" in a long-term Capacity Reservation and Transportation Agreement (CRTA) for the CATS pipeline, and in particular the meaning of the phrase "the CATS Transportation Facilities are available to perform the Transportation Service". The House of Lords held that this phrase is performative: the notification by the CATS Operator that the facilities are available is a declaration which, if made honestly and in good faith, fixes the Commencement Date and gives rise to the parties' contractual obligations, even though a latent defect unknown to the operator might later be discovered. The court preferred a commercially sensible construction consistent with the agreement as a whole and with express contractual remedies (such as clause 3.1 and clause 7.5) over the Court of Appeal's retrospective, fact-dependent approach. The Lords also held that clause 7.5 (the reduction provision) did not entitle TGTL to a reduction in send-or-pay payments during the period when it had no obligation to have its facilities tied in; the CATS Parties therefore remained entitled to the payments and the guarantors were liable.

The disputes arose out of the CRTA under which the CATS Parties (pipeline owners and operators) agreed to reserve capacity for TGTL from the date the CATS Operator notified that certain conditions had been satisfied (the "Commencement Date"). The Commencement Date triggered (i) the CATS Parties' obligation to accept, transport and redeliver TGTL's gas and (ii) TGTL's liability to make large quarterly "send-or-pay" payments.

Background and procedural history:

• The CRTA was executed in 1990 before construction of the 255-mile CATS pipeline. TGTL later contracted to buy gas (the J-Block GSAs) expecting to use the reserved capacity.
• The CATS Operator notified that conditions had been satisfied; that notification took effect on 1 April 1993. TGTL began paying send-or-pay sums but stopped in February 1995 and sought repayment, contending that the Commencement Date conditions (in particular that the Transportation Facilities were "available") had not in fact been satisfied because the T6 entry point could not have been tied in on 1 April 1993.
• Langley J at first instance rejected TGTL's substantive challenges and held the facilities were "available"; the Court of Appeal allowed TGTL's appeal on the single ground of availability and held the notification was invalid retrospectively; the CATS Parties appealed to the House of Lords.

Issues framed:

• Whether the phrase "the CATS Transportation Facilities are available to perform the Transportation Service" is descriptive of a contemporaneous factual state (requiring actual ability to be used immediately) or is performative/a declaration by the Operator fixing the Commencement Date.
• Whether clause 7.5 provided TGTL with a right to reduce send-or-pay payments during the period in which TGTL asserted capacity was not available.

Reasoning and outcome: The House of Lords construed the relevant phrase as performative: the Operator's notification is a declaration that the pipeline is open for business and fixes the Commencement Date, provided the Operator honestly believed the facilities could perform the Transportation Service. This construction was supported by the commercial matrix of the agreement and the detailed drafting elsewhere (notably the extensive definition in clause 7.5 of what constitutes capacity not being available). The Lords explained that the contract already provided remedies for failure to construct or commission (for example clause 3.1 and damages) and that a retrospective nullification of the Commencement Date by later discovery of latent defects would be commercially irrational. On clause 7.5, the Lords held TGTL was not entitled to a reduction during the relevant period because TGTL had not yet satisfied the separate preconditions (tie-in, certification etc) required for the Transportation Service to commence. The appeals were allowed and the orders of Langley J restored.

Appeal allowed. The House of Lords held that the phrase "the CATS Transportation Facilities are available to perform the Transportation Service" in the Commencement Date definition is in character a performative declaration by the CATS Operator which, if made in good faith, fixes the Commencement Date and gives rise to the parties' obligations; latent defects unknown to the operator do not retrospectively invalidate that notice. Further, clause 7.5 did not entitle TGTL to reduce send-or-pay payments for the period in issue because TGTL had not yet satisfied the tie-in and commissioning prerequisites for the Transportation Service. Therefore TGTL and its guarantors remained liable for the send-or-pay payments and Langley J's orders were restored.